There’s one question many small business owners ask themselves everyday: “What is the true value of my business?”
It’s an important question because, whether you realize it or not, the value of your business will have a big impact on both personal and professional aspects of your life. So, knowing the answer is vitally important.
A business valuation, conducted by a credentialed valuation expert, estimates the economic value of your interest in a business. It is most often used to determine the selling price of a business, the amount needed to fund a buy-sell agreement, or to assign values to individual assets held by the business. Once you know the value of your business, you can put in place more effective plans and strategies for future growth, business continuation, succession planning or employee retention. It can also help you plan for your own future.
How business value impacts your retirement
There are many sound business reasons why you need to know your company’s value, but there are also personal ones. If you’re relying on the value of your business to fund your retirement, then having an accurate picture of its worth is critical. You’ve no doubt worked hard to build your business and one day you’ll look to enjoy the fruits of your labor. But what if the value of your business is less than what you think it is? (Related: Ways to increase business value)
Retirement planning is, for many, a life-long endeavor. You’ve likely accumulated savings and assets over time, perhaps decades, and may have plans in place to draw down money each year as retirement income. If proceeds from your business, which may be your most valuable asset, is an integral part of your retirement plan, it is critical that you know now just how much of the business value will be available to you in the future.
The sooner you know the answer, the faster you can take steps to create other sources of retirement income outside of your business if you need to. And, should economic conditions change for the worse and adversely affect the business value, you’ll be in a better position as you move toward the next chapter of your life.
Estate planning and taxes
If, on the other hand, the value of your business is higher than you think, other serious issues can arise. If something unexpected happens to you — or your business partner — would your family be prepared to address the tax liabilities for your business? What about your legacy and the value you want to pass on to your loved ones? Or, more likely, if you remain healthy, would you unknowingly leave money on the table when it comes time to sell or transfer ownership? Getting a clear picture of the value of your business can help you prepare for the future, so you’ll be ready no matter what may happen over the years.
What’s your business worth?
Your team of professional advisors can help guide you in determining the best way to undertake the business valuation process. Once completed, the value of your business should be reviewed periodically. Business valuation can impact your life in so many different ways. The question you should be asking yourself now is, “How do I get started?"
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This article was originally published in May 2017. It has been updated.